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It's all about businessThu, 12 Mar 2015 12:37:37 +0000en-UShourly1http://wordpress.org/?v=4.1.1Additional Power for the Gatekeeperhttp://blog.iese.edu/faceit/2011/additional-power-for-the-gatekeeper/
http://blog.iese.edu/faceit/2011/additional-power-for-the-gatekeeper/#commentsWed, 03 Aug 2011 15:57:04 +0000http://blog.iese.edu/faceit/?p=1369Since ancestral times, wherever there is a narrow passage that many people have to cross, someone will try to establish itself as the gatekeeper and exercise control on the passersby. In fact controlling passageways, from maritime straits to oil pipes, has been one of the reasons humanity has endured many wars.

The digital space is not free of gatekeepers: they take the name of platform owners. When thinking about platforms that exert gatekeeping power, probably the first example that comes to mind is game consoles. Sony, Microsoft and Nintendo are masters of value capturing by charging game developers a fee for each copy of the games sold that run on their boxes. This allows them to recuperate the R&D costs needed to develop the console and the subsidies necessary to bring them to market at an affordable price.

The most known platform, Wintel, does not charge a commission on each program sold that runs on it. Intel and Microsoft make money solely by selling chips and operating systems. From the early days of DOS, Microsoft –and to some extent Intel, have tried to help developers to enhance their platform by providing tools to help them quickly produce Windows-specific software. Given the difficulties porting software from one operating system to another, once critical mass is reached, developers only develop for Windows and users are forced to buy Windows because there is where the applications are.

So, traditionally, companies striving for gate keeping strategies have been following one of two strategies: (1) grow the platform by heavily subsiding it to then extract rents by charging complementors to use it, the game consolesstrategy, or (2) leverage network externalities so much that users have no choice but to buy the platform as all complementors are there already; the Wintel strategy.

But now there is a new strategy: make money both ways, by selling the platform very profitably, and at the same time charge complementors to use it: this is Apple’s strategy. That Apple makes a ton of money selling iPhones is not a secret (never mind iPads!) As can be seen in the side graph by asymco, Apple makes about 70% OF ALL profits made by the smartphone industry(*) with an estimated $6 billion in Q2 2011. Having seen this, one could think that the business model would rely on growing the platform Wintel-style, by inviting as many developers as possible to fend off competing Android attackers. But nothing further that reality. It is true that the Apple Store hosts and distributes apps for free (this was announced with great fanfare by Steve Jobs when introducing the App Store, see video from minute 3:20 or so) and charges 30% commission on all paid-for apps allegedly only to subsidize running the store, but just last week announced that it would enforce its restriction on direct-from the app purchases. What this means, in fact, is that apps like e-readers that to purchase content directed the user directly from the app to the developer’s site to performing the transaction, alien to the Apple store, would be “illegal” in Apple’s terms. The consequence is that the purchase has to be made through the Apple app store and therefore be subject to the 30% commission.

Even when you have an enormous market share, this is a risky move, as you are inducing complement providers to move to a competing platform and therefore weakening yours and strengthening a competitor. I cannot imagine Microsoft expecting to get a cut on each application sold for Windows, never mind on content read or watched on a Windows PC. What will content providers do in the Apple case? Some initial movements by publishers seem to indicate indicate that not much, and apps like Nook are already updated removing the direct purchase button. This will imply that users will have to either buy the content via the Apple store, or go directly to the web page of the content provider, transact there, and then move the content to the iPhone or iPad. Cumbersome and less clean, but such is life when the gatekeeper enforces a toll: passersby take an alternate route.

What this will do the power of the iOS platform remains to be seen. The next months will tell, but seeing the profit share on the smartphone market, Apple can make a few experiments.

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(*) This, by the way, should make all companies that rushed to build Android phones think about the commoditization of their product and what future they have. But this will be the topic of another post.

]]>http://blog.iese.edu/faceit/2011/additional-power-for-the-gatekeeper/feed/0Do we need Internet traffic controllers?http://blog.iese.edu/faceit/2011/do-we-need-internet-traffic-controllers/
http://blog.iese.edu/faceit/2011/do-we-need-internet-traffic-controllers/#commentsThu, 06 Jan 2011 22:37:53 +0000http://blog.iese.edu/faceit/?p=1035A Spanish version of this post has been published at IESE website

About to start a long holiday weekend, 90% of Spanish air traffic controllers simultaneously called in sick. The airport chaos that was created is well known. To the extent that the Spanish Government stepped in with the firmest possible measures. For the first time ever, the government declared a state of alert in Spain. In other words, air traffic controllers were officially mobilized and under military penal code. This action led to a miraculous healing of the air traffic controllers and a return to business as usual Sunday, December 5. What would happen if something similar occurred with Internet traffic controllers in Spain or somewhere else in the world? Absolutely nothing. Since so far there are not such Internet traffic controllers who regulate and manage the information flows in the network of networks. If Internet has functioned fairly well in the absence of traffic controllers, shall Internet keep operating without them? The answer to that question lies at the heart of the debate on network neutrality. Heated arguments and protests related to network neutrality are analog to the ones expressed by the ten of thousands of irate travelers stranded at airports in Spain last December. However, the term network neutrality encompasses multiple interpretation with political, technological, business and social implications. For this reason, it is necessary to open a thorough debate to incorporate each of these dimensions, avoiding Manichean positions that do not help to find zones of possible agreement.

“the wisdom of crowds” versus “the revolt of the masses”

Governments are torn between preserving network neutrality and at the same time having some control over the Internet. On the one hand, politicians are fascinated by “the wisdom of crowds”, which is behind of phenomenon like Wikipedia. Along those lines, the Spanish Senate has just unanimously approved a motion requesting the Government to guarantee by law the principle of network neutrality. The text approved by the Senate is essentially a statement of universal principles for data packets flowing through networks managed by Spanish telcos. It reads regarding the data packets: “always receive the same treatment regardless of their content, origin, destination or protocol without filtering traffic in any way to prioritize, limit or prevent access to certain pages or services.” A statement of this nature easily generates unanimous support, but hardly has any practical implementation.

On the other hand, the same political class is shocked by “the revolt of the masses” that massively disseminate confidential documents on WikiLeaks. It is well known the pressure that the U.S. government has exerted with Amazon to deny hosting services to WikiLeaks, or with MasterCard and PayPal not to channel WikiLeaks’ donations. As a matter of fact, the actual content of the leaked documents revealed that some political regimes implement a sophisticated filtering of information circulating on the Internet, pointing directly to the Chinese Government,behind the attacks on Google a year ago. WikiLeaks has highlighted the dilemma that the Internet is essentially an area controlled by corporations and governments which tolerates the principle of freedom of speech.

“It’s the network, stupid.”

This freedom we enjoy on the Internet is similar to the one found in the telephone network, where there are no restrictions on who we call to and what we talked about in our telephone calls. However, from a technological standpoint, the telephone network is very different to Internet. In the telephone network, all the intelligence is concentrated in the network itself. For this reason, traditionally handsets were dumb, with limited functionality to make and receive calls, which were connected to an “intelligent” network. The telephone network provisions a dedicated channel that allows the voice to be transmitted with a minimum quality for an interactive communication. The case of the Internet is the opposite, where the intelligence resides in the terminal or “intelligent” computers which are interconnected to a “dumb” network, which only helps to move information between those computers. However, this “dumb” network does not analyze the content of such information. Upon this principle resides the concept of net neutrality. So far, so good. Notwithstanding, Internet was designed to deliver data in an asynchronous way. For this reason, the transmission of files or e-mails are well suited for the Internet. This type of information is quite tolerant to delays and that may arise on the network. However, if we use an application like Skype video call, the call quality will degrade severely if there is heavy congestion on the network. This congestion translates into variable delay preventing an intelligible communication. In these instances, it would be desirable that such information would travel in a segregated channel analog to bus or HVO lanes to avoid traffic jams. Likewise, introducing more “intelligence” on the Internet could filter out most junk mail before it reached our mailbox or could more effectively block the spread of computer viruses.

Obviously, having a “smarter” network requires an investment by telcos. They argue that network neutrality in the strict sense stifle the innovation needed to build a faster and smarter Internet to cope with the exponential growth of traffic. In fact, it is estimated that Internet traffic will fivefold increase in the 2008-2013 period, reaching a staggering 55,000 Petabytes per month with one petabyte equals to one trillion of bytes. Most of this traffic, 91% according to a study of Telefónica, corresponds to information related to video content. With this situation, telcos must wield heavy investments both in the fixed and mobile networks. They claim that such investments will be affordable if only if their income is coupled to the increase of traffic. Today, this is not the case since the majority of users enjoy flat-fee or all-you-can-eat broadband. However, such a tariff models have provided significant profits to telcos during the last decade. Flat-fee broadband is behind the rapid growth of broadband penetration and the derived recurrent revenues from their DSL customers. The increase of Internet traffic is already a serious problem in the mobile network. Here, the success of the iPhone has dramatically boost the use of Internet in smartphones. As a matter of fact, telcos have not dimensioned their mobile networks to support such heavy traffic. Therefore, they play with the principle of scarcity of resources to differentiate services and rates based on the contents of the data. Thus, Internet users would pay more or less subject to the service they use, similar to the rates of courier companies depending on the urgency of delivery and weight of the package. Unsurprisingly two weeks ago, the Federal Communications Commission (FCC) announced to pass a controversial set of rules that broadly create two classes of Internet access, one for fixed-line providers and the other for the wireless net. Likewise, carriers do not look kindly on the substantial profits obtained by companies like Google. This revenue is manly captured through advertising based on traffic generated by their Web services. Such traffic, mostly from YouTube, constitutes 6.4% of all global Internet traffic. Telcos argue that such businesses are only possible if they invest in infrastructure to interconnect Google services with their audience. For this reason, telcos demand what is known as “Google tax”, as Cesar Alierta, President of Telefónica, said last February. In other words, companies like Google should share a part of their profits with telcos. In this way, service companies would pay telcos an easement over their networks.

“All about Apps”

However, the concept of “Google tax” is inherited from a unidirectional vision of the information flows. Namely, a few large companies generate most of the content to be distributed to users who consume this content in a similar fashion to the TV and radio broadcasting. Nevertheless, it is precisely the bidirectional nature of Internet that has allowed each of its users to become not only consumers but also content providers. This democratic component of the Internet, every user is equal in the network, is what has encouraged and fostered innovation on the Internet. This is how many Internet startups have succeeded, like Google and Facebook. Moreover, it also allows any user to compete with the incumbent Media moguls by writing on her/his own. For this reason, Internet users are fighting for the Internet to remain a public resource, in terms of its governance. Without that network neutrality, the Internet is in danger to become an environment where access to content and distribution are tightly regulated, as is the case of cable TV.

A few months ago, Wired magazine proclaimed that the Web was dead, and increasingly access to Internet will not happen through the web but through applications (Apps) in three screen sizes: small screen on the mobile, medium screen on the computer and big screen on the TV. Therefore, if we really want to address the issue of network neutrality on a global basis, we will have to enter in the debate of who and how these screens control the access to the Internet. For instance, this control can be exercised by Apple, in its refusal to approve a video calling application for the iPhone which can compete with Apple or a partner. Furthermore, the results of a Google search, which uses a proprietary algorithm, could be biased to favor a Google client versus another who is not. In fact, the European Commission has recently warned both Apple and Google to take action to prevent collusive behavior.

Undoubtedly, addressing network neutrality will require certain compromises from each of the involved agents. On the one hand, a clear regulation for telcos to maintain their neutrality in the interconnection with other networks, similar to what happens with the interconnection of calls between an AT&T customer and a Verizon one. Moreover, the Regulator should allow telcos to make tariff differentiation by type of service, such as a high-definition video, which consumes more resources than to send an email. This differentiation should be allowed telcos to undertake the necessary investment on the Internet to provide the required intelligence and capacity. In such cases, differentiation of services should be based on the principle that similar situations should be treated in the same way, but not all situations must be treated in the same way. That is to say, telcos cannot discriminate on the basis of the content provider but only on the type of content (video, e-mail, etc.). The debate is served. If we need Internet traffic controllers, we would better know which privileges we will grant them. Otherwise, one day we can find the information withheld as the 600,000 passengers in Spanish airports last December.